The present mannequin of ‘free’ ad-supported music streaming might be headed for an overhaul.
Final month, Sony Music Group Chairman Rob Stringer took intention at freemium providers provided by the likes of Spotify throughout a presentation for Sony Group traders on Might 30.
Stringer pointed to a “poor contribution to streaming monetization” from ‘free’ streaming tiers, stating that “their main goal” – versus producing significant income – is to “convert customers into paying subscribers”.
The Sony government then urged that DSPs ought to shut what he known as the rising “worth hole” between paid and free customers, particularly in mature streaming markets.
Stringer’s resolution: charging present free customers a “modest price” to take heed to music and different content material through ad-supported providers.
Stringer’s suggestion of a “modest price” wasn’t 1,000,000 miles away from an thought contained inside Goldman Sachs‘ just lately launched annual Music In The Air report.
Mentioned report famous that “because the monetization of paid subscription improves, we consider that there’s [an] alternative to higher monetize the huge pool of freemium customers and evolve the ad-supported providing to enhance paid conversion charges”.
The Music In The Air Report authors, led by Lisa Yang, wrote: “As premium plan pricing continues to enhance, we consider that the audio ad-supported streaming providing may also must evolve to enhance the monetization of ad-supported customers (as an illustration by means of increased advert hundreds and CPMs, or by means of introducing an promoting gentle tier for a small cost) and/ or assist increased conversion charges in direction of the premium plan (by means of putting higher content material or characteristic restrictions on the freemium service).”
As famous by Goldman’s analysts, Premium music streaming monetization has been bettering currently through worth hikes.
Spotify, the world’s largest subscription music streaming service, simply introduced its second worth hike within the house of a 12 months for its US subscribers. (Spotify’s Premium particular person tier will now price $11.99 per thirty days within the States. Comparable pricing adjustments are happening within the UK and are anticipated quickly sufficient in Europe.)
So, what would occur if Spotify, as Stringer urged, now moreover started charging a modest price for entry to its ad-funded tier?
Alternatively, what would occur if Spotify did one thing much more radical… what if, in a bid to pressure the conversion of ‘free’ customers to Premium subscribers in mature markets, SPOT shut down ‘free’ in these territories fully?
Right here, MBW crunches the numbers on how such situations might play out…
1) The ‘modest price’ mannequin: world
You’ll be able to have a look at this primary half as an unrealistic speculation… however one which units the scene.
Earlier than we start crunching the numbers, we must always say this: In Q1 2024, ad-supported income at Spotify globally stood at €389 million ($422 million), barely greater than 10% of the full cash generated by the platform. (Subscriptions weighed in with EUR €3.25 billion; see beneath.)
We point out that as a result of the modeling MBW has executed in every stage of our evaluation beneath doesn’t take this $422 million of quarterly promoting cash into consideration.
For one factor, we can not know how a lot of Spotify’s present advert income would stay if its viewers had been instantly requested to pay a ‘modest’ price to entry advertising-supported music. It’s a good wager at the very least a few of it might be sacrificed.
Now… let’s transfer on to our scene-setter.
In response to Spotify, of its 615 million world MAUs in Q1, 388 million of them had been ad-supported customers.
So… what would occur if we began charging these 388 million individuals the equal of USD $1 per thirty days to entry SPOT’s ad-funded tier?
Alternatively, what would then occur if we began charging them USD $2.50 or $5 per thirty days?
Let’s additionally take into account one other metric: what would occur if 10% of SPOT’s present world free customers paid up? What if it was 25% and even 50%?
The solutions to those questions are beneath.
Throughout the parameters we’ve set out, Spotify would generate anyplace from USD $465.6 million per 12 months (for a $1 month-to-month ‘modest’ cost, with 10% of at the moment free customers signing up) to USD $11.64 billion per 12 months (for a $5 month-to-month ‘modest’ cost, with 50% of at the moment free customers signing up).
Now… once we talked about the above was an unrealistic speculation, we meant it.
There are just a few causes for that, but it surely’s primarily summed up by this:
- There are numerous components of the world the place the equal of USD $5 (roughly Spotify’s world Premium month-to-month ARPU) can be thought-about removed from a ‘modest price’, and would, the truth is, purchase you a number of full Spotify Premium subscriptions;
- Take, for instance, India. A regular particular person Spotify Premium sub in India as we speak will price you ₹119 per thirty days – the equal of simply USD $1.43. That’s with out extra potential reductions through Household Plans, telco bundles, native annual offers, and so on. (India isn’t solely one of many fastest-growing music streaming markets, however by the top of 2024, it’d truly change into the No.1 streaming market on the earth by quantity.)
Rob Stringer’s suggestion of requiring a ‘modest price’ to entry Spotify’s ad-funded tier, due to this fact, was certainly extra of a nod to extra mature markets just like the US, UK, and Europe – moderately than so-called “rising markets” like India.
That’s very true when you think about that the full variety of paying subscribers within the USA grew by simply +5.2 million in 2023, based on RIAA, in comparison with almost triple that determine (+15.1m YoY) in 2020.
Plus, based on IFPI knowledge, ad-supported revenues from audio music platforms grew by simply 3.2% YoY in america in 2023. That’s slower than inflation!!
With all of that understood, let’s now solely give attention to the 2 most ‘mature’/established designated markets in Spotify’s company panorama: North America plus Europe (together with the UK).
2) The ‘modest price’ mannequin: NORTH AMERICA + EUROPE
Utilizing approximate math primarily based on Spotify’s personal numbers, MBW estimates that the service at the moment has round 128 million ‘free’ customers throughout North America (the US and Canada) and Europe (together with the UK).
With out weighing you down an excessive amount of with math earlier than the nice bit (!), that calculation relies on two items of knowledge:
- In response to SPOT, of its 615 million whole MAUs on the finish of Q1 2024, North America and Europe (UK included) collectively claimed 46% of them; and
- In response to SPOT, of its 239 million paying subscribers in the identical interval, North America and Europe (UK included) collectively claimed 65% of them. (Sure, nonetheless as we speak, solely round a 3rd of Spotify’s paying subscribers are primarily based exterior NA and Europe/UK.)
- (Further caveat: Our 128 million estimate right here is truthful, however will barely overestimate the variety of ‘free’ customers in these territories. That’s as a result of, in Spotify’s monetary numbers, there are a relative handful of counted Premium subscribers who aren’t truly MAUs – i.e., premium subscribers who haven’t actively used their account within the interval.)
Proper. With all that established, let’s get all the way down to enterprise.
If there are roughly 128 million ‘free’ Spotify customers in North America and Europe (together with the UK), we will decide what income affect a ‘modest price’ requirement for SPOT’s ad-supported tier might need in these territories.
As soon as once more, the beneath calculations don’t take into account any income that may proceed to be generated from promoting on these tiers in these markets. They solely present how a lot new cash the introduction of a ‘modest price’ on Spotify’s ‘free’ providing in North America and Europe would possibly generate.
As soon as once more, we’ve thought-about whether or not that ‘modest price’ may be price USD $1, USD $2.50, or USD $5; we’ve additionally thought-about what would occur if 10%, 25%, and 50% of the present free customers in these markets signed up.
Right here’s what occurs: Spotify generates anyplace between USD $153.6 million per 12 months (for a $1 month-to-month ‘modest’ cost, with 10% of at the moment free NA + Europe customers signing up), all the best way to a attainable USD $3.84 billion per 12 months (for a $5 month-to-month cost, with 50% of at the moment free NA + Europe customers signing up).
3) The whole ‘free’ shutdown in North America and Europe
For Spotify and its companions, in fact, any restriction of / paywalls added to its ‘free’ tier must make financial sense.
Keep in mind: In Q1, Spotify’s world promoting enterprise generated USD $422 million. The hypothetical numbers above (RE: ‘modest price’ introduction) must develop this determine considerably to be worthwhile.
Critics of Spotify’s free tier will level out that no different audio service – from Apple Music to Amazon Music, TikTok Music, YouTube Music, SiriusXM/Pandora, and TIDAL – presents a equally everlasting free tier to that at the moment offered by SPOT. (Most provide limited-time free tiers that expire after three months earlier than customers should pay.)
Is Spotify due to this fact freely giving an excessive amount of, too cheaply in mature streaming markets? Ought to a ‘modest price’, or different restrictions on SPOT’s ad-funded tier, be launched for that reason alone?
(Reminder that Goldman Sachs suggests a possible “promoting gentle” tier – i.e. ramping up the amount of adverts on fully-free Spotify, and charging customers a modest quantity to do away with some of them.)
These against curbing Spotify’s free tier argue that with out it, customers will return to piracy or just be taught to be totally happy, music-wise, by ad-funded YouTube.
It’s a debate that can proceed to rage. However for now, let’s add to it with yet one more set of hypothetical numbers.
It’s not only a ‘modest price’ addition to Spotify’s free tier that’s being mentioned behind the scenes at music rightsholders.
Two senior world figures within the enterprise have just lately talked to MBW in regards to the potential of pushing Spotify in direction of a Sirius XM/Apple Music-style trial mannequin, at the very least within the US and Europe.
Think about if, tomorrow, all present and new subscribers to Spotify had been informed: You might have three months from as we speak free – after that, it’s pay… or go.
Under, we mannequin out how this might look, revenue-wise, in North America and Europe. (As soon as once more, this doesn’t take note of the income that may be misplaced with out any ad-funded tier.)
We cut up out the mannequin into two potential baskets:
- A share of present ‘free’ customers in North America and Europe (inc UK) beginning to pay USD $4.94 per thirty days. This determine is the USD-equivalent of Spotify’s world ARPU for Premium customers in Q1, which was EUR €4.55;
- Clearly, that $4.94 Premium month-to-month ARPU determine in Spotify’s numbers is world, and can due to this fact have been naturally lowered by subscribers in ’rising’ territories. (Reminder: In India, Premium subscriptions at the moment price the equal of USD $1.43 per thirty days.) For that reason, and for instance the ‘high finish’ estimate of revenues from a free-tier shutdown, we’ve additionally modeled what would occur if a share of present ‘free’ customers in North America and Europe (inc UK) began paying $11.99 per thirty days – Spotify’s new premium worth in america.
The upshot: If Spotify might convert 25% of ‘free’ customers within the US and Europe to paying for a Premium subscription (through a ‘free’ shutdown) it might anticipate to generate anyplace between USD $1.9 billion and $4.6 billion in new income per 12 months.
Notice: All EUR-USD foreign money conversions on this evaluation concerning calendar Q1 2024 have been made on the common fee of the European Central Financial institution for the quarterly interval.Music Enterprise Worldwide
